Natixis Commodity Markets reports that in the run-up to this year’s LME Dinner, activity in the base metals sector has been dominated by the continued fall-out from the sub-prime crisis. “Such has been the speed and enormity of developments in September/early October it is perhaps easy to forget that the sub-prime crisis first emerged well over a year ago (the summer of 2007). It quickly became clear that it was not just a financial crisis, but that it was also an economic problem as its impact was initially focused on a key consumer of base metals – housing, and then spread to other important sectors, the automotive and white goods industries. Over a year later the non-residential sector is now being engulfed by crisis. Since the 2007 LME Dinner, all the supportive factors behind the bull market have slowly been removed.
“In some respects, we were surprised by the sharp rally in some of the base metals earlier in the year, which saw aluminium, copper and tin make new cycle highs. At the time, it was already clear that demand growth had already peaked. Most of the indicators that we analyse pointed to an extension of this period of weak demand, which has, in fact, proved to be the case.
“Physical premiums have been trending lower for most of the year, while the data on shipments of nonferrous semis also confirmed the poor demand conditions. When the decline in the key economic indicators was added to the mix, then it was difficult to explain the move of copper and aluminium cash prices to $8,985/t and $3,292/t respectively in early July.
“Earlier this year supply disruptions, particularly for copper, were still a supportive factor in the market. However, the news flow concerning strikes and technical problems has begun to dry up. More important is the change in the market’s response to supply cutbacks, i.e. the market is now tending to ignore them rather than rally sharply on the news as earlier in the year. For example, the cutbacks by BHP Billiton and Xstrata for nickel have done little to stem the downtrend in prices.
“In Natixis Commodity Markets’ 4th Quarter Metals Review, we consider three alternative scenarios. Given the deterioration in both the financial sector and the real economy i.e. sectors that consume industrial metals, it has become clear that our low case scenario is now the most likely scenario to pan out.” These low case projections are detailed in the table below.
Going forward, Natixis expects little change in the fundamentals of the aluminium market. Production is expected to remain strong in the second half, with capacity expansion in China more than offsetting the impact of high-cost smelter closures. Elsewhere, forward looking economic indicators paint an uninspiring picture for demand, which is the key driver for the market for the rest of the year. As a result, the forecast is for supply to exceed demand in 2008 by 600,000 t overall. Unless there are additional cutbacks in primary aluminium production, Natixis Commodity Markets projects that the market will remain in surplus next year (250,000 t).
Natixis Commodity Markets has revised its supply-demand balance and is now projecting a market surplus of 100,000 t of copper in 2008 and 200,000 t in 2009. The weak state of demand expected both this year and next year also supports these surpluses. “We believe that although copper prices will continue on a downward trend, they will not quite duplicate the massive declines seen elsewhere in the sector as inventories remain low and the market remains prone to disruptions.
Taking into account the turnaround in Chinese trade, the supply-demand balance analysis has been amended slightly for this year, reducing the projected surplus to just 20,000 t from Natixis’ previous estimate of 65,000 t. “Natixis Commodity Markets still has the lead market in a surplus in 2009, although we have scaled back our projection to 60,000 t from 85,000 t. We expect an acceleration in mine output growth as the ramp-up of San Cristobal and the restart of Magellan more than offsets mine closures that have been announced so far. Importantly, we expect China to revert to being a net exporter of refined lead.
So far this year, the nickel market has seen demand weaken, reflecting the cutbacks in output in the stainless steel sector. Realistically, demand is not expected to improve this year. As such, Natixis Commodity Markets is projecting a slightly higher surplus of 30,000 t in 2008. This compares with the previous forecast of 10,000 t. In the short term, we could see new lows in the nickel market.
Due to the ongoing supply problems being experienced by tin’s major producers, combined with the lacklustre demand environment, little change is expected in the tin market over the coming months. Demand is unlikely to collapse as much as in other markets as tin is better shielded from the sub-prime crisis than other base metals. Consequently, inventories should remain at low levels.
“In our view, the zinc market remains largely unchanged from our previous Quarterly Review. Although there is news of some closures, most noticeably in Australia, we believe that much larger reductions are required to tighten the concentrate market, and subsequently restrict the growth in refined output. The recent fall in treatment charges and fall in LME inventories could be seen as a bottoming out of the zinc market. With demand growth outside of China expected to remain at low levels over the remainder of the year, and production expected to remain steady, any significant move upwards is likely to be restricted. After taking into consideration the latest cutbacks in mine production, Natixis Commodity Markets still has the zinc market in surplus this year (125,000 t) and next year (75,000 t).” These projections are more positive than the forecasts put forward by ILZSG.
Price forecasts $/t (low case)
2005 2006 2007 2008 2009
Al 1,898 2,567 2,640 2,725 2,100
Cu 3,684 6,731 7,126 7,750 6,600
Ni 14,733 24,827 37,181 22,500 14,000
Pb 976 1,288 2,595 2,225 1,500
Sn 7,370 8,763 14,536 19,500 16,000
Zn 1,385 3,273 3,250 2,000 1,600